Economics Journal: India’s Opportunity Gap

If you’re poor and underprivileged in India today, how likely is it that you’ll have access to opportunities to improve your lot in life? To what extent does where you’ve come from determine where you’ll end up? And will your children have opportunities that you didn’t?

In this 20th anniversary year of economic reform, which has given us an annual economic growth rate currently at about 8.5%, millions have been lifted out of poverty. The flip side is that growth has also led to an increase in inequalities in wealth and income. In simple terms, the pie is getting bigger, but some people are getting a smaller share of that bigger pie.

A recently released UNDP report puts things in perspective, by highlighting the many facets of inequality that characterize India today. The study’s headline finding is that India’s ranking in the global human development index would fall by 30% if inequalities of income, education and healthcare were accounted for. To put things in concrete terms, with no adjustment, India is already ranked at 119 out of 169 countries, worse than Namibia and Vietnam and better than Pakistan and Congo.

Even India’s best performing state in this index, Kerala, ranks below Sri Lanka and the Philippines. Gujarat, often cited for its economic success, ranks slightly below India as a whole, and like India would lose about 30% of its ranking when the inequality adjustments are made.

To some observers, higher inequality at least for a while is the price we have to pay for higher growth. They would cite the famous “Kuznets curve,” a staple of development studies which claims to show that inequality first rises and then falls with economic development.

What this misses is that unequal outcomes in areas such as income may be the result of underlying inequalities of opportunity, such as access to education and health. Unequal access could also be the result of belonging to an underprivileged group, such as a religious or ethnic minority, or in the Indian case specifically someone belonging to a Scheduled Caste, Scheduled Tribe and Other Backward Class.

Let’s take inequality of opportunity as reflected in unequal access to education. Even with the deck stacked against you, a good education has the potential to open doors and take you places. Conversely, it’s common sense that someone less educated won’t do as well in the workforce and therefore will earn a lower income. While inequality of access to education in India is well-documented by scholars and one of the highest in the world, what is less understood as yet is how to quantify the impact on outcomes such as wages and income.

A few recent statistical studies have begun to plug the gap. Ashish Singh of the Indira Gandhi Institute of Development Research in Mumbai finds that the percentage of total wage inequality that can be accounted for by inequality of opportunity, including education, is anywhere from 13% to 34% on average. This means that someone’s wage could be up to one third lower because they lacked access to opportunity, in particular education, compared to someone who was educated.

At least in theory, you have some control over how much education you seek, assuming you get access. But an inherited social hierarchy, such as caste, creates a problem of a different order of magnitude, since there’s nothing you can do about this. Further, while the impact of access to education on income is pretty straightforward, the effect of caste is more difficult to pin down. Since belonging to an underprivileged community tends to go together with other deprivations such as lack of access to education, health or land, it’s very difficult to isolate the effect of caste per se.

A recent joint study by researchers at the University of Maryland and the National Council of Applied Economic Research in India, found that caste matters. They find in particular that lower castes have less land, lower educational status, poorer nutrition and health care, and fewer social connections to get help when needed. This results in lower income and poor social outcomes.

For instance, in villages with predominantly lower-caste inhabitants, the average consumption expenditure per person is on average 2,200 rupees less per year compared to someone who’s upper caste, adjusting for differences in education and landownership. Without this adjustment, the actual difference is 9,019 rupees, strongly suggesting that belonging to a lower caste and the other inequalities of opportunity tend to go together. Overall, while educational differences can “explain away” some of the difference in outcomes, about half of observed income inequality seems to be caused by a difference in caste.

Let’s come back to the questions I started with. The answer to the first question is unequivocal: if you’re from an under-privileged background, chances are that you’ll do less well than someone who’s not. Likewise, the answer to the second question – to what degree does where you’re from determine where you’ll go -- is “it matters a great deal."

As for the third question – will your kids get chances you didn’t -- it’s more a function of aspiration than of statistics. And this is the crucial one because social cohesion requires you to believe that even if things are bad today, they’ll be better for your children and that everyone has a shot at being successful. The possibility of upward mobility is often the glue that binds us together.

While the political empowerment of underprivileged groups in India is well-developed, as evidenced in particular by state-level politics, the corresponding empowerment in access to opportunity clearly lags behind. This poses dangers as unequal access in turn may convert positive aspiration into its opposite: resentment. And resentment has the potential to breed unexpected, roiling social unrest. Just look across the Gulf: India has a vibrant democracy, which distinguishes it from the authoritarianism that characterizes the countries in turmoil in the Middle East. Still, it’s something to bear in mind while we reflect on 20 years of reform.